Fundamentals of Corporate Finance

Chapter 6

Bond Valuation

Overview of Lecture

Corporate Finance in the News

Insert a current news story here to frame the material you will cover in the lecture.

Bonds and Bond Valuation

Bonds and Bond Valuation

Example of a Bond

You should use a relevant example of a bond from your own environment to illustrate the characteristics of a bond.

Bond Values and Yields

Bond Values and Yields

Bond Valuation

Bond Values and Yields

Pixie plc example

PV of Face Value:

Present value = £1,000/1.0810 = £1,000/2.1589 = £463.19

PV of Annuity:

Annuity present value = £80 (1 1/1.0810)/.08

= £80 (1 1/2.1589)/.08 = £80 6.7101 = £536.81

Bond Value:

PV of Face Value + PV of Annuity = £463.19 + £536.81 = £1,000

Bond Values and Yields

Bond Values and Yields

Bond Value Formula

If a bond has (1) a face value of F paid at maturity, (2) a coupon of C paid per period, (3) t periods to maturity, and (4) a yield of r per period, its value is:

Bond value [1 1/ (1 ) ] / / (1 ) Present value Present valueBond value of the coupons of the face amount

t tC r r F r

Example 6.1Semi-Annual Coupons

Example 6.1Semi-Annual Coupons

Interest Rate Risk

Interest Rate Risk

Example 6.2Current Events

Example 6.2Current Events

Example 6.2Current Events

Example 6.3Bond Yields

Bond Yields

Spreadsheet Strategies

You should show students how to calculate bond values and yields with a spreadsheet. It is also a good time to introduce your students to Solver and Goal Seek (or their equivalents).

More about Bond FeaturesExample 6.2 – ICO Bond

Bond Features

Terms of a Bond

Bond Ratings

Different Types of Bond

Bond Markets

Work the Web

Visit Euronext to see how bonds are being reported in real time.

You should also visit FT.Com to see the new bond issues in the previous week and discuss these.

Inflation and Nominal Rates

The Fisher Effect

Example 6.4The Fisher Effect

Example 6.4The Fisher Effect

From the Fisher effect, we have:

1+ (1+ ) (1+ )1.10 1.081.1880

R r h

Therefore, the nominal rate will actually be closer to 19 per cent.

The Term Structure of Interest Rates

Terminology

The Term Structure of Interest Rates

The Term Structure of Interest Rates

Bond Yields and the Yield Curve

Work the Web

You should visit FT.Com to discuss the most current Yield Curve for your region.

Activities for this Lecture

Thank You